The Market’s Self-Regulating Nature
• In every transaction, the buyer and seller consider only
their self-interest, or their own personal gain. Selfinterest is the motivating force in the free market.
• Producers in a free market struggle for the dollars of
consumers. This is known as competition, and is the
regulating force of the free market.
• The interaction of buyers and sellers, motivated by selfinterest and regulated by competition, all happens
without a central plan. This phenomenon is called “the
invisible hand of the marketplace.”
Advantages of the Free Market
Economic Efficiency
• As a self-regulating system, a free
market economy is efficient.
Economic Growth
• Because competition encourages
innovation, free markets
encourage growth.
Economic Freedom
• Free market economies have the
highest degree of economic
freedom of any economic system.
Additional Goals
• Free markets offer a wider variety
of goods and services than any
other economic system.
Centrally Planned Economies (Ch.2-3)
• How are centrally planned economies
organized?
• How did the centrally planned economy of the
former Soviet Union function?
• What problems exist within centrally planned
economies?
Organization of Centrally
Economies
In a centrallyPlanned
planned economy,
the government
owns both land and capital. The government
decides what to produce, how much to produce,
and how much to charge.
Socialism is a social and political
philosophy based on the belief that
democratic means should be used
to distribute wealth evenly
throughout a society.
Communism is a political system
characterized by a centrally planned
economy with all economic and
political power resting in the hands
of the government.
The Former Soviet Union
• Soviet Agriculture
– In the Soviet Union, the government created large state-owned farms
and collectives for most of the country’s agricultural production.
• Soviet Industry
– Soviet planners favored heavy-industry production (such as steel and
machinery), over the production of consumer goods.
• Soviet Consumers
– Consumer goods in the Soviet Union were scarce and usually of poor
quality.
Problems of a Centrally Planned
Economy
Centrally planned economies face problems of
poor-quality goods, shortages, and diminishing
production.
Modern Economies (Ch.2-4)
• Why are many modern economies mixed
economies?
• What role does the government play in a
mixed economy?
• How do mixed economies in different
countries compare?
• What role does free enterprise play in the
United States economy?
The Rise of Mixed Economies
Market economies, with all their advantages,
have certain drawbacks.
Limits of Laissez Faire
Laissez faire is the doctrine that
government generally should not
interfere in the marketplace.
Governments create laws
protecting property rights and
enforcing contracts. They also
encourage innovation through
patent laws.
Government’s Role in a Mixed Economy
In a mixed economy,
• The government purchases
land, labor, and capital from
households in the factor
market, and
• Purchases goods and services
in the product market.
Circular Flow Diagram of a Mixed Economy
Product market
monetary flow
physical flow
Households
expenditures
Government
physical flow
monetary flow
Factor market
expenditures
Firms
Comparing Mixed Economies
• An economic system that permits the conduct of business with minimal
government intervention is called free enterprise. The degree of
government involvement in the economy varies among nations.
Continuum of Mixed Economies
Centrally planned
Free market
Iran
North Korea
Cuba
South Africa
China
Russia
France
Botswana
Greece
United Kingdom
Canada
Peru
Source: 1999 Index of Economic Freedom, Bryan T. Johnson, Kim R. Holmes, and Melanie Kirkpatrick
Hong Kong
Singapore
United States